Property Rights and Registration

Property Rights and Housing Finance

Definition

Strong property rights are crucial to formal housing
finance, and most housing lending today relies on clearly defined and documented
rights to the residential property. This is not only a preference—it is a rule of
most financial regulators. Alternative approaches to securing housing loans
that do not rely on strong real property rights—for example, pledges of personal
property, personal guarantees and lease-purchase or installment purchase schemes—have
often been used, but these all have issues of their own and are widely considered
to be second-best when compared to traditional mortgage lending.

Other minor approaches
to housing lending used today, such as housing microfinance loans, are in the nature
of personal loans; they do not rely on real estate collateral and therefore do not
require the same high-quality property rights as mortgage lending.

Frequent Issues with
Property RightsOwnership rights to residential property appear to be
widely respected throughout the world today. Problems typically arise not from the
absence of rights or challenges to rights, but from ambiguities in legal rights,
the inability to properly document rights to the satisfaction of traditional lenders,
or legal restrictions on how rights may be used. Two examples encountered today
are the problems of owners of housing located on state-owned land and the absence
of clearly defined condominium property rights.

Inability to obtain appropriate rights and documentation
to housing located on state-owned land is surprisingly widespread. This difficulty
may arise even though the occupation and use of the land is perfectly legal, but
through bureaucratic indifference or conflicts the rights themselves are poorly
documented or not documented at all. Similarly, in some countries in which all land
is considered to be owned by the state and subject only to rights of use and occupancy,
placing a mortgage on residential property may require complex administrative approvals
that can be difficult to obtain.

Another example of poorly specified property rights is
the lack of modern condominium regimes for multifamily housing. Failing to adequately
define the condominium property has led to difficulties in creating mortgages; failure
to define and provide realistic mechanisms for enforcement of the obligations of
co-owners can affect property maintenance and values and thereby increase the risk
for lenders. See “Type of Tenure” in Europe.

Other familiar property rights issues affecting housing
finance include the extended family rights of post-socialist economies (e.g. Russia),
which required that all family members, even minors, consent to a mortgage, with
the state representing the interests of minors. Similarly, the laws of several countries
that permit polygamy (e.g. Tanzania) required that all wives consent to a mortgage,
and it was not unusual for previously unidentified wives to appear to thwart enforcement
of mortgage rights. These particular issues have been mostly resolved by now, but
new ones arise from time to time. Many of these may be mere curiosities in the overall
scheme of things, but other issues can have real impact on the ability to lend.
On this page we will try to cover how the definition and enforcement of property
rights may affect housing lending, tracking developments with longstanding and unresolved
problems and new issues that arise from time to time.

Registration
of Rights
A topic closely related to property rights—in fact, a
significant subtopic—is the development of systems for registering and protecting
rights. Long established in developed countries, creation of these systems is a
major objective and focus of investment in emerging and transitional countries today.
These systems contribute to definition of real property rights (e.g. “an unregistered
property right is not a legal right”); just as important, they create the means
to protect rights through publicity and legal acknowledgment.

By publicizing
the existence of the right to the property and giving it some level of legal recognition
and protection, systems for registering rights to real property provide housing
lenders with the tools they need to avoid risk. Among other things, a good registration
system allows lenders to determine with some level of confidence:
·The ownership right
to the property, without which there is no right to pledge.
·Existence of any
prior and potentially conflicting rights to the property that may be superior to
the right of the mortgage. The extent of this ability may depend on the requirements
of the system—which interests are registered and which are not—but where good systems
exist, most significant interests in property must be registered to prevail over
other rights.
·The priority of
the lender’s interest over subsequently created legal interests in the property.
With few exceptions, the rule of “first in time, first in right” is almost universal
among registration systems today.

In many emerging countries absence of a good or even
adequate registration system is the main impediment to increasing the volume of
housing lending, causing a shortage of registered housing “product” on which loans
can be safely made. Registration systems can also impose significant costs on housing
lending, including attorney, notary and registration fees on both the property and
the mortgage. These costs can discourage borrowing and/or reduce loan proceeds available
for housing needs. Similarly, registration requirements and costs have in some cases
been impediments to development of mortgage securities markets, leading to calls
for separate and centralized mortgage registries in some places to serve housing
markets.

There are many variations in registration systems today
as emerging and transitional countries choose from a “menu” of options and appear
only occasionally to adopt without modification one of the long-established registration
models such as title registration or deeds recordation. Hybrids abound, in many
cases with good reasons related to fiscal, political and cultural differences.

In these pages we hope to follow some of the discussion
of trends and best practice in current developments of property rights registration
systems. Topics could include, for example:
·The long and still
ongoing discussion of the relative benefits of state title registration systems
and simple deeds recordation systems supported by private-sector title insurance;
·The choice between
administrative and judicial systems of registration, and its implications;
·Registration fees
and their effects on lending and property market informality; public good or government
profit center?
·Indemnification
systems and paying for errors;
·What do lenders
really need? Registration under difficult conditions—what can and should be registered
and on what terms?
·Good recent models
and case studies.

As usual, these pages would benefit immensely from advice,
materials and other contributions from readers in all countries, and all are encouraged
to send comments and materials of interest on developments in their registration
systems that can be posted for the benefit of all users of this site.

Steve Butler

Stephen B. Butler is a Principal
Research Scientist in the International Projects Department of NORC at
the University of Chicago.He has advised international donor agencies
and ministries, central
banks and regulatory commissions in 30 transitional and developing
countries in
5 regions, focusing on land reform and administration, housing and
housing
finance, and mortgage market development.